Term
| effective annual interest rate |
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Definition
(1+i/n)^n-1
i=stated annual interest rate;
n = number of compounding periods |
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Term
| What is the difference between with-without and before-after analysis? Provide a concrete example of a situation when the benefit-cost results would be different using the two approaches. |
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Definition
| Before-after assumes that the present continues into the future. With-without requires that you ask what happens if you do nothing and what happens if you do the project. See banana blight problem from homework for concrete example. |
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Term
Name and define the three most widely used measures of project worth (the ones we used in class)?
What are the advantages and disadvantages of each?
Will they always give the same results in terms of project ranking and project acceptance? |
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Definition
| The problems: NPV has a problem of scale, big projects generate big benefits and the social rate of discount is not known with precision; IRR can give more than one possible solution and it assumes that net benefits are reinvested at the IRR, which might not be possible; B/C has a problem of replicability. IRR doesn’t require use of the social discount rate, NPV provides a concrete dollar value and B/C ratio gives an indication of efficiency and also gets around NPV large project issue. No they will not give the same results for either situation (see slide 34). |
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Term
What are the three major differences between economic and financial analysis? Why are the treatments different in these areas?
What is the major objective of government budget impact analysis? |
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Definition
economic analysis considers opportunity cost, financial analysis considers time and money
They are different because transfer payments don’t result in a net change for the entire market, while shadow prices correct for market distortions, which a financial analysis will include. |
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Term
What are the three major approaches to handling uncertainty in benefit cost analysis? What are the advantages and disadvantages of each?
Is correlation among variables an issue for any of the three approaches? If so, explain why. |
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Definition
Sensitivity analysis,
switching values for important variables and
Monte Carlo simulation using @risk.
Correlation among the variables is moderately important for the calculation of switching values and is extremely important for Monte Carlo simulation. |
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Term
| What is the difference between revealed preference (RP) and stated preference (SP) in economic and b/c analysis? Provide an example of each. |
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Definition
| RP infer env values from consumer behavior eg, travel cost, random utility, hedonic pricing. SP estimates env values by asking consumers' willingness to pay for preserving env assets eg. contingent valuation and discrete choice. |
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Term
Why is correlation among input variables important in Monte Carlo simulation (@Risk)?
If inputs are uncorrelated, but you mistakenly model them as perfectly correlated, would your estimated variance be too high or too low? |
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Definition
When inputs are correlated (i.e. they can be predicted by each other), it reduces the randomness/quality of the simulation.
Too low. |
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Term
| What is hedonic pricing? Example of how is it used in economic or benefit-cost analysis? 2 steps in the analysis? |
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Definition
A market valuation for a non-market good. Used in benefit-cost analysis in order to find a price for environmental and non-market goods, eg a view.
(1) Estimate a hedonic price fn by regressing observed price on a vector of explanatory variables
(2 )estimate a demand curve |
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Term
Why is contingent valuation analysis used?
Describe the general procedure for contingent valuation analysis.
Also list and describe at least 3 problems encountered in contingent valuation analysis. |
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Definition
to elicit preferences or willingness to pay for (or protect against) changes in the quantity or quality of goods.
Set up a market, get bids, estimate WTP/WTA, estimate bid curves, aggregate data, evaluate area under the curves for welfare.
Sample bias,
non-response bias
interviewer bias |
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Term
| Describe the travel cost method of calculating benefits. Include the major steps in doing the analysis. For what purposes is it used in benefit-cost analysis? What are some problems or limitations of the method? |
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Definition
It is a way of valuing the recreational benefits of a given location by measuring the total costs incurred by individuals in traveling to visit them.
Major steps involved in undertaking travel cost analysis are:
(1) Estimate total # of visitors to a particular location.
(2) Calculate average distance traveled per visitor.
(3)Calculate opportunity cost of time (travel * wage rate).
(4) Compute total travel cost (time costs + travel costs and aggregate these over total # of visits per year.
Some problems: (1) Choice of dependent variable.
(2) Some trips are merely "legs" of a multipurpose trip. |
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Term
Based on the following data, calculate the barley prices to use for the economic and financial analysis assuming the processing plant uses both domestic and imported barley and there is no quality difference between domestic and imported barley.
World ref FOB barley price $140
Dom transport farm2processPlant LC25
ocean ship cost barley $20
Import tariff barley 20%
Port charges LC20
Transport port2process plant LC15
Foreign exchange shadow price 1.1 |
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Definition
Economic Analysis
Imported and Domestic barley price = ((($140+$20)*1.1)*8)+20+15-25
Financial Analysis
Imported = ((140+$20)+(160*.2))*8)+20+15-25
Domestic = ((140+20)*8)+20+15-25 |
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Term
| Formulae to calculate the barley prices to use for the economic and financial analysis assuming the processing plant uses both domestic and imported barley and there is no quality difference between domestic and imported barley. |
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Definition
Economic price (import parity price):
[(FOB+freight)*spfx]*exrate+ptchgs+ptm-ftm
Financial price:
[(FOB+freight)*(1+tariff)]*exrate+ptchgs+ptm-ftm |
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Term
| Explain why depreciation and interest should not be included as costs in the economic analysis. |
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Definition
| Interest and depreciation are excluded from the economic analysis (what's only concerned with actual resource flows) to avoid double-counting. |
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Term
| Why do we do both financial (private) and economic (social) analysis for public sector projects? Shouldn't we be interested only in the economic analysis outcomes? |
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Definition
| We need to know both the incentive for the private investor and we also need to know the overall welfare benefits. |
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Term
| Why is correlation among ionput variables important in Monte carlo simulation (@Risk)? Would correlated annual values or uncorrelated annual values result in higher variance in NPV? Why? |
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Definition
When inputs are correlated (i.e. they can be predicted by each other), it reduces the randomness/quality of the simulation.
Uncorrelated annual values. Variance in PV is smaller when successive benefits are uncorrelated than when they are positively correlated. |
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Term
| For what purpose is cost allocation (such as in the SCRB method) used in project analysis? Does the cost allocation analysis change the results of the economic analysis? |
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Definition
| Cost allocation is used in circumstances in which the benefits of a project are shared among multiple beneficiaries. No impact on economic analysis. |
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Term
Based on the following data, calculate the barley prices to use for the economic and financial analysis assuming the processing plant uses both domestic and imported barley and there is no quality difference between domestic and imported barley.
World ref FOB barley price $130
Dom transport farm2processPlant LC 30
Ocean shipping cost for barley $15
Import tariff on barley 20%
Port charges LC15
Transport port2processinPlant LC25
Foreign exchange shadow price 1.1 |
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Definition
Economic price (import parity price):
[(FOB+freight)*spfx]*exrate+ptchgs+ptm-ftm
Financial price:
[(FOB+freight)*(1+tariff)]*exrate+ptchgs+ptm-ftm |
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Term
| Suppose your analysis done in nominal terms results in an IRR of 50%, and the same analysis done in real terms results in an IRR of 25%. What is the rate of inflation for your analysis? |
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Definition
| (1+nominal IRR)/(1+ real IRR) -1 = inflation |
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Term
| Why is correlation among input variables important in Monte Carlo simulation (@Risk)? If inputs are in reality uncorrelated, but you mistakenly model them as perfectly correlated, would your variance be too high or too low? |
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Definition
| Failure to account for correlation can affect both the mean and variance of output distributions. Variance will be too low, (cuz a high or low draw in one period will carry through each successive period). |
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Term
| Describe the general procedure for contingent valuation analysis. also, list and describe at least 3 problems encountered in contingent valuation analysis. |
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Definition
(1) Identify sample of respondents from population
(2) ask questions about their valuations of a good
(3) estimate a willingness-to-pay for the good
(4) extrapolate results to entire population
(1) Sample bias: sample is not randomly generated.
(2)Non-response bias: some systematic cause behind non-responses
(3) Hypothetical: Some respondents might not fully understand the good in question
(4)Neutrality: Questionnaires lead responses in certain direction |
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Term
| Explain why depreciation and interest should not be included as costs in the economic analysis but counted as deductions for calculating taxable income. |
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Definition
| Depreciation and interest (ways of calculating investors' time value of money) are included in calculating a private cash flow from the private investment view. Including in economic analysis would be double counting the investment. |
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Term
| Debt calculations are done originally in nominal terms using a nominal interest rate? Why? What is the formula for converting between nominal and real interest rates? Suppose you have calculated in your analysis a nominal and a real IRR. How can you verify that they are equivalent? |
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Definition
| That is the way the institutions work. |
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Term
| In Monte Carlo simulation (@Risk), under what circumstances is it more likely that the Monte Carlo mean will differ from the non-stochastic results? Why? How does correlation among variables affect the variance? |
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Definition
| When here are nonlinear transformations, Monte Carlo mean will vary from the deterministic mean. Because mean of fn is a fn of the mean only if it is linear. |
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Term
| What is a shadow price (as the term is used in benefit-cost analysis)? How are shadow prices used in project evaluation? Why are they used? |
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Definition
| Shadow price is weighted average of the ratios of market clearing to official ClF prices. They are used either in SER and SCF. |
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Term
| Define the purpose of working capital? |
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Definition
| Working capital is done in real to make nominal and real terms consistent. Working capital corrects for the fact that firms incur costs before they earn any revenues. |
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Term
| What is an import parity price? |
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Definition
| What captures the opportunity cost to the nation of a particular good |
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Term
| We converted 2 main forms of debt repayment. What are they and how do they differ? Be sure to explain what is constant in nominal terms and what varies in each for of debt repayment. |
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Definition
(1) same nominal amnt is deducted from the principal (loan) balance.
(2) Same total payment is paid annually in nominal terms. At beginning of loan repayment period, most of total payment is interest then is mostly principal payments at end. |
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